India relaxes its stance on contract R&D centres, to relief of multinationals
Rules imposed on contract R&D centres earlier this year by the Indian government have been relaxed and amended after it transpired foreign multinational companies would incur a tax liability for outsourcing more of their R&D activities to India.
Circular 2, released on March 26, has been withdrawn because it gave taxpayers the impression there was a hierarchy
Circular 3, also released on March 26, has been amended and reissued as Circular 6 because it seemed vague about the conditions for deciding whether a development centre is a contract R&D service provider with insignificant risks.
“The circular  now provides that the countries which will be considered as low-tax would be notified and also elaborated that conceptualisation and design of the product and providing strategic direction and framework would be considered as economically significant functions,” said Manisha Gupta of Deloitte.
However, Gupta said the amended Circular 3 could have gone further in its guidance.
“Different industries, such as biotech, pharma, IT etcetera, have varied nature of functions to be undertaken in their value-chain. The amended definition is brief and could have provided more clarity to [the transfer pricing officer (TPO)] and the taxpayers on what the Revenue would construe as economically significant functions for different industries.”
In addition to these clarifications, the government also made public, for the first time, a report made by the Rangachary Committee to review taxation of development centres and the IT sector, dated September